Insurance and reinsurance companies are well positioned to help close the $ 123 billion financing gap of small and medium-sized enterprises in the Arab world, a sector long regarded as the backbone of an economy and whose financing can also be promoted as an asset class.
SMEs find it difficult to obtain financing from traditional banks because the latter have difficulty in understanding the risks and in evaluating them. According to Olivier Placca, co-founder of the French credit insurance platform Tinubu Square, insurers have an interest in remedying this, because they are not bound by certain regulatory requirements that make banks hesitate.
âBanks have regulatory constraints – the rules of the Basel framework, for example – preventing them from mobilizing the required capacity in the SME market. The capacity of insurers and reinsurers is at its highest; a good thing to do is to transfer some of this risk from lenders to insurers, âPlacca told FinTech Abu Dhabi on Wednesday.
âIf an SME asks for financing, if it or the bank has a credit insurance policy, it can use it as collateral for financing. This allows banks to benefit from compensation and to mobilize capacities at a lower cost for SMEs.
Globally, SMEs play an important role in economies. In the Arab world alone, SMEs make up 97 percent of businesses, employ half of the workforce – or around 150 million people – and account for around 40 percent of gross domestic product, according to figures cited by Nadine Chehade, responsible for the financial sector. specialist at the World Bank.
“SMEs are an engine of the economy of tomorrow because they are the creators of the millions of jobs that are needed in the market every year,” she said.
A pre-Covid-19 report from the International Monetary Fund said that increasing SMEs’ access to finance in the MENA region at the mid-level of emerging and developing economies would increase annual growth by up to 1% and could create up to eight million jobs in the Arab world by 2025.
But the pandemic has exposed another vulnerability of the sector. Policy rate cuts, liquidity support and loan guarantee programs have helped lower borrowing costs to ease the burden on businesses during the crisis; SMEs in the region had relatively limited access, with just 33 percent receiving at least one type of political support compared to 48 percent for large firms, the IMF said in a recent study.
âThere are a lot of high perceived risks coming from SMEs. For example, information asymmetry: it is extremely difficult for anyone who wants to finance an SME to have the appropriate data to make a good subscription, âsaid Ms. Chehade.
Technology can also help close the gap, with a “small number” of FinTech companies trying to take advantage of the “huge” market opportunity, she said.
Andre Casterman, founder of Casterman Advisory and chairman of the FinTech committee of the International Trade and Forfaiting Association, argued that SME finance and trading can be presented as an asset class to institutional investors – entities that raise funds. on behalf of its members – including hedge funds, mutual funds and endowments.
âIf we rely on the balance sheet capacity as offered by the banks, that will not be enough, because often the risk appetite and the capacity of funds are not there,â he said.
“We need to get liquidity from non-bank institutions – family offices, pension funds and corporate treasury – that recognize that trade finance is a real economy.”
Credit bureaus – entities that collect information about individual credit scores and make it available to financial institutions – can also play a key role in helping SMEs obtain financing.
âIf we continue to work only with the banks, it is not enough; it’s the importance of having credit bureaus, âCasterman said.
Despite the pandemic, the UAE’s Etihad credit insurance was able to secure around 2.1 billion dirhams ($ 572 million) in non-oil trade from SMEs in October, according to chief executive Massimo Falcioni.
âWhat sets the UAE apart is their preparedness and the foundations put in place years before the pandemic, especially in the digital sector. Years of planning and implementing digitization systems within government and private entities have made it easier for businesses to transition, âhe said.
Update: November 25, 2021, 6:00 a.m.